Neoliberalism is an economic philosophy that conceptually describes a move towards free markets, capitalism, and a diversion from government ownership. The typical policies associated with neoliberalism include free trade, globalization, privatization, and changes in government spending to stimulate the private sector.
Neoliberals favor a progressive tax regime and do not oppose measures such as bailing out companies in financial distress. Being a rather dynamic topic, the meaning is interpreted by different schools of thought in several ways and is often subject to debate.
Neoliberalism is an economic philosophy that conceptually describes a move towards free markets, capitalism, and a diversion from government ownership.
The typical policies associated with neoliberalism include free trade, globalization, privatization, and changes in government spending to stimulate the private sector.
The two prominent schools of thought on neoliberalism are the Austrian School and the Chicago School.
History of Neoliberalism
Neoliberalism has gained traction over the last 25 years. The term neoliberalism means a new kind of liberalism. The idea of a liberal economy became prominent in 1776 when a Scottish economist named Adam Smith wrote a book called “The Wealth of Nations.”
In his book, Smith propagated the idea of getting rid of government intervention and claimed that the best way for an economy to flourish is through free trade and deregulation.
Several years later, in the 1930s, another economist named John Keynes challenged the policy of liberalism and inferred that such a policy was suitable for capitalists. Government intervention was deemed crucial for the welfare of the public, and it led to several leaders transitioning and working towards the common good.
However, the concept of neoliberalism is now being practiced on a global level, following the decline in corporate profitability.
Liberalism and Neoliberalism
Liberalism is a similar concept but is more open-ended to cover all aspects of society. It is a broader philosophy that holds liberty to a high standard and incorporates all aspects of society (social, economic, and political).
The basis of liberalism is liberty, equality before the law, and consent of the governed. This broader idea is characterized by additional themes, such as civil and human rights, gender equality, freedom of speech and religion, and secularism.
Neoliberalism, on the other hand, is characterized by a more limited and focused approach and deals with specific policies that help the market operate efficiently.
Characteristics of Neoliberalism
Privatization includes selling all state-owned entities and businesses to the private sector. They can include banks, transportation services, utility companies, and health and educational institutes. The purpose is to normally achieve efficiency, as the private sector is thought to be more effective when running businesses.
However, it can also be argued that privatization typically results in the concentration of wealth in a few hands and makes such services more expensive to acquire – as the motive is of profitability and not the public good.
Deregulation entails reducing government regulation on economic activities, such as trade or imposing taxes on certain businesses. Deregulation will allow companies to become more profitable and improve the overall quality of running businesses.
3. Free Trade
Free markets are marked by globalization and greater openness towards investment and trade. With total freedom on the movement of capital between different geographies, economic growth is expected to occur, along with better and cheaper access to resources.
However, opponents argue that such a move may exploit labor union workers, and unregulated markets may not be the most feasible option for some economies.
4. Reducing Public Expenditure
Government expenditure is normally targeted towards the health and education sectors or towards building infrastructure. A reduction in public expenditure may cause the poor to suffer more, as they will be able to access public healthcare and education services.
It is up to the private sector how they manage these services and how accessible they are to the overall community.
5. Elimination of the Public Good
A related concept to the previous point states that people are motivated to work towards their individual well-being rather than think about society overall.
In certain instances, neoliberalism eliminates welfare and social programs, which adversely impacts the poorest segment of the population.
Neoliberalism – Schools of Thought
Although there are diverse schools of thought related to neoliberalism, two prominent theories are mentioned below:
1. Austrian School
The Austrian school of thought originated in the late 19th or early 20th century in Vienna. The basis behind the Austrian school is to study the purposeful actions of individuals. The term is being used to denote free-market economics.
2. Chicago School
The Chicago school of thought was inspired by an economist who worked with the Austrian School. It describes a neoclassical school of thought based on rational expectations.
It focuses on the importance of no intervention from the government and the absence of private transactions in government intervention.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: